Challenges to the Israeli economy: addressing the symptom or the illness?

Dany Bahar, PhD

2

Israel’s strong economy

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Israel’s strong economy

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Strong foundations: R&D as % GDP (2013)

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But, high inequality among OECD

Icelan

d

Denmar

k

Finlan

d

Belgium

Austria

Luxe

mbour

g

Hunga

ry

Franc

e

Poland

Irelan

dIta

ly

New Z

ealan

d

Portug

al

Spain

United

King

dom

Israe

l

United

Stat

esChil

e

OECD 0.20

0.25

0.30

0.35

0.40

0.45

0.50

Source: OECD Income Distribution Dataset

Gini Coefficient, 2014

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… as well as relative poverty rate

Icelan

d

Czech

Rep

ublic

Norway

Slovak

Rep

ublic

Netherl

ands

Sweden

Austria

Sloven

ia

Belgium

United

King

dom

Canad

aIta

lyLa

tvia

Greece

Japa

n

Mexico

Turkey

Israe

l0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Relative Income Poverty Rates, 2014

Source: OECD Income Distribution Dataset

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More bad news…• Child poverty rate is 24.3% (2014),

just behind Turkey • Top 20% earns 7.4X as bottom 20%

» Just behind Chile, Mexico, US and Turkey

» Iceland (#1) 3.4, Ireland 4.8, Italy 5.8, Greece 6.3

• Poverty rates for ultra-orthodox and Arabs are above 50%. For rest of society is ~10%

• What’s behind that? Two reasons…

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First, highly unequal employment rates…

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Why this heterogeneity?• State provide different incentives to

different 'tribes’: e.g. child allowances on ultra-orthodox

– Fertility from 2.76 to 5.88 between 1955 and 1980s

– Labor force participation went from 68.3% in 1989 to 43.3% in 2000

– Child poverty in Israel rose from 9.6% to 35.8% between 1979 and 2006.

– Cohen et al. (2013) show a causal relationship between child allowances and fertility rates in Israel

• Some safety nets might play an important role

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…but getting them to work is not enough

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The “scale-up” nation? Not quite…• ~1-1.5K startups per year• Not enough jobs: 10.7% of total

employment in 2008 to 8.9% in 2013• Strong incentives to start, but not to

grow: tax incentives only to large exporters

• Integrating labor force to productive firms is key to sustained growth

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Second, high relative cost of living…

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…and housing keep rising

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Highly concentrated markets…

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… with few imports

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For example, in food…

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Red tape in housing markets…

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Why care about economics?• 60%+ of Israelis think economic

gaps are an existential threat (?!)• New political parties focused on

economic welfare sell themselves as “a-tribal”» Israel should move from a ‘tribe-based’

to ‘income-based’ economic policies» This will help in improving transparency

and reduce corruption

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Open questions…• Unemployment for all:

» Safety nets -> conditional cash transfers / EITC

» Addressing regulation to scale-up hi-tech firms that’d employ non-engineers; providing engineering ‘boot camps’ to under-employed populations

• Cost of living: address the symptom (i.e. public housing or subsidies) or the illness (i.e. foster competition and supply)?